October 10, 2018
Internal Revenue Service
P.O. Box 7604
Ben Franklin station
Washington, DC 20044
Re: Notice of Proposed Rulemaking/Contributions in Exchange for State and Local Tax Credits
Thank you from the Montana Nonprofit Association for the opportunity to submit comment on the Notice of Proposed Rulemaking referenced above.
Montana Nonprofit Association (MNA), represents 600 charitable nonprofit member organizations and the larger nonprofit community in the great state of Montana. We respectfully request you consider alternatives to the proposed rules related to treatment of certain state and local tax (SALT) credits, given the impact of the proposed changes on programs that currently exist and have contributed to the quality of life for Montana’s people for many years. Montana’s Endowment Tax Credit has been in place since 1997. We believe the proposed rule changes will harm Montana communities by diminishing the effectiveness and use of the credit.
In 1997 the “Montana Endowment Tax Credit” (METC) was the first legislation of its kind in the nation; it was hailed as a creative, nonpartisan approach to bolstering rural philanthropy. Perhaps you have heard of the “philanthropic divide”, a phrase which describes the disparity in charitable giving and other nonprofit resources in rural states as compared to more populated states. At the time the METC was enacted, Montana was ranked 49th in the nation for foundation giving. The METC is a solution that has helped bridge the divide since 1997.
The METC has been considered by the legislature for renewal every six years and has been renewed continuously because it creates a win for all parties: the citizens of Montana who donate, charities who deploy the earnings from endowed funds on behalf of hundreds of worthwhile causes in communities across the state, and partners in local and federal government, whose burdens are lessened because of philanthropy. We especially invite you to consider the unique structure of the METC which is received for contributions which benefit Montana in perpetuity because the donations must be made to a permanent endowment. We believe the proposed rules will diminish a charitable giving incentive that is working well for Montana and Montanans.
The current Montana statute provides for two types of gifts:
Planned Gifts – Credit against state income tax liability in the amount of 40% of the present value of any planned gift to a permanent endowment of a Montana charity up to a maximum amount of $10,000 per year per taxpayer. This applies to individual or business entity taxpayers.
Outright Gifts – Credit against state income tax liability in the amount of 20% of the present value of any outright gift by a business entity to a permanent endowment of a Montana charity up to a maximum of $10,000 per year per taxpayer. This applies to corporations, small business corporations, partnership or limited liability company taxpayers.
We are proud that the METC was not designed specifically for high net worth givers, but rather for individuals of any income level interested in ensuring their contributions could be permanently available for the benefit of Montana. In the most recent year for which data is compiled, 689 Montana donors received $2.46M in tax credit for qualified contributions, meaning the average credit received was less than $4000. However, the dollars that will go to work for charitable endeavors, which lessen the burden of government, is exponentially greater.
Ordinary Montanans make use of this innovative incentive, leaving us to disagree with the Treasury and IRS’ estimation that taxpayers participating in tax credit programs before H.R. 1, who are beneath the SALT cap and are not subject to the alternative minimum tax, “have never used any state tax credit programs affected by the proposed regulations, and that the proposed regulations will have at most a highly limited marginal effect on taxpayer decisions to donate to tax credit programs that pre-date TCJA. . . ”
RECOMMENDATIONS AND REQUESTS:
- Create an Exception for State and Local Tax Credit Programs that Require Gifts to be made to a Qualified Permanent Endowment
Montana, Iowa, Kentucky, Maryland and North Dakota are the only states in which tax credits tied to charitable giving required gifts to be made to a qualified permanent endowment. The intent of the METC was to incentivize charitable giving in a manner that would benefit Montana both now and in the future through endowed giving. In fact, individual contributions go a step further. They must be planned gifts as opposed to outright gifts. At this time the new SALT credit programs, proposed post H.R. 1, are not tied to endowed giving. The METC represents a logical exception which recognizes the intent and value of existing tax credit programs that were never intended to serve as SALT “workarounds”. Furthermore, by requiring gifts to be made to permanent endowments in order to be eligible for the METC, the use of this tool has been more limited, which would allay Treasury and IRS concerns about “significant revenue losses” associated with credit programs created to circumvent SALT workarounds.
- Create an Exception for State and Local Tax Credit Programs in Existence Prior to January 1, 2018
We recognize state legislatures are considering or adopting proposals to create new SALT credit programs with the aim of enabling taxpayers to claim charitable contributions that are fully deductible for federal tax purposes, while also providing the taxpayer with a dollar-for-dollar offset of SALT liabilities. We further understand there is an expressed concern that failure to amend the current regulations would “precipitate significant revenue losses that would undermine and be inconsistent with the limitation on the deduction for state and local income taxes adopted by Congress in section 165 (b)(6).” If new programs created specifically to circumvent the new limitations on SALT deductions are a compelling concern, the regulations should be narrowly tailored to address these new programs without undermining pre-existing programs that have effectively served communities for years.
- Increase the de minimis Exception Described in Section 1.170A-1(h)(3)(vi)
We urge Treasury and IRS to review pre-existing tax credit programs and determine an appropriate de minimis exception that would preserve the benefits under these pre-existing tax credit programs. We believe a de minimis exception of 50% would preserve the benefits of most of the programs that use percentages to determine the allowable deduction or credit.
These recommendations and regulations, if incorporated into the new regulations, can preserve the benefit of Montana’s existing Endowment Tax Credit program while still meeting the intention of Treasury and IRS to address concerns about potential state workaround proposals to the SALT cap enacted by H.R. 1. These requests are not intended to be mutually exclusive, and we ask Treasury and IRS to consider each recommendation as part of an overall strategy to develop regulations that reflect and enable the intent of the law.
These comments were developed by the Montana Nonprofit Association’s Public Policy Council which serves to advise the Board of Director’s on policy issues which fall in MNA’s purview and align with MNA’s public policy agenda. Thank you for considering our recommendations. If you have questions, please contact me directly at 406-449-3717 or [email protected]. Thank you.
Liz Moore, Executive Director
Montana Nonprofit Association